The development of Bermuda's insurance regime is a result of prevailing market conditions and considerations. Recent enhancements to Bermuda's insurance regime have focused on commercial insurers (particularly in the life sector) and this trend looks to continue through and beyond 2023. That said, the BMA recently updated the Insurance Code of Conduct (the Code) in September 2022. The Code applies to all Bermuda insurance companies and the updates focus on good governance and risk profile management and address environmental, social, and corporate governance (ESG) issues.

This article considers the following trends and developments:

• management of climate change risk by commercial insurers;
• proposed enhancements to the regulatory regime for commercial insurers; and
• the recent changes to the Code.

Thematically, the recent regulatory and legislative developments in Bermuda are centred around prudence and ESG. Given the global and complex nature of the insurance sector it is anticipated that many insurers registered in Bermuda already incorporate most of the enhancements in their business operations or decision-making process, though the added reporting requirements may be something that insurers will need to be aware of and manage going forward.

Management Of Climate Change Risk For Commercial Insurers

A trend which is becoming increasingly common has been the rise of the recognition of the importance of ESG issues in the decision making of insurers, both as they underwrite risk and invest premium (i.e. carry out their day-to-day operations) but also in terms of governance and the structuring of the business itself. 'Greenwashing' remains, however, a material concern for both investors and regulators such as the BMA and providing a framework within which insurers can assess their climate risk is a necessary step to addressing these concerns.

Addressing 'E' in ESG, and recognising the importance of climate risk as a global issue and the global nature of (re)insurance as a sector, the BMA has published a guidance note (the Guidance Note) setting out its expectations in relation to how commercial insurers approach both assessing the impact that climate risk has on the risks it insures, but also an insurer's own impact on climate change.

The Guidance Note covers four broad areas for insurers to consider:

• Corporate Governance: commercial insurers should ensure that their governance structures and processes adopt a forward-looking approach and their boards should carry out regular assessment of business strategy vis-à-vis climate risk, including assessing and managing the financial risk that may stem from climate risk;
• Risk Management: commercial insurers must establish effective frameworks that are proportional to their risk profile to identify, manage and monitor climate related risks including, amongst other considerations, (i) assessing their policy holder's climate exposure; (ii) the value of assets insured which may be affected by climate risk; and (iii) operational, reputational, strategic and legal risks;
• Climate risk scenario analysis: scenarios should cover all material physical and transitional risks stemming from climate change, though the Guidance Note acknowledges that the modelling of such risk is complex and still evolving and recognises that such modelling should be proportional to the risk profile of the insurer; and
• Reporting: a common theme throughout the Guidance Note is the need to be able to report accurately to the BMA on the above points.

The BMA stated in the Guidance Note that the framework should be adopted and implemented by the end of 2025. That said, commercial insurers are required to include an assessment of its status in implementing and adopting the frameworks set out in the Guidance Note in their annual year end filing of its Own Risk and Solvency Assessment which is filed with the BMA starting from year-end 2022.   

We anticipate that many insurers as a matter of practice will already have an eye turned toward climate risk and will already be undertaking, in some form or another, many of the assessments set out in the Guidance Note. Reporting to the BMA in relation to the assessment may be a new feature, although again, we expect that insurers will already be carrying out some form of reporting either by statutory requirement in the jurisdictions in which they operate or because of investor demand.

Enhancements To The Regulatory Regime For Commercial Insurers

In February 2023 the BMA published a consultation paper in relation to its proposed enhancements to the regulatory regime for commercial insurers. The impetus behind the BMA's proposed changes is to ensure the appropriateness of the BMA's regulatory tools and to incorporate good practice methodologies adopted by its regulatory peers in other jurisdictions (i.e. the EU in the context of its Solvency II arrangements and the National Association of Insurance Commissioners in the US). The majority of the proposed changes are actuarial in nature. It is anticipated that further guidance will be issued during the course of 2023 in regards to this topic.

The Insurance Code Of Conduct

The Code applies to all insurers registered under the Insurance Act 1978 (i.e. both commercial and limited purpose) and the BMA adopts a qualitative approach in assessing an insurer’s compliance with the Code, basing such assessment by reference to the nature, scale and complexity of the relevant insurer's operations.

In September 2022 the BMA issued a revised Code which thematically focused on ESG related issues together with enhancing risk management and governance of insurers. Many of the changes incorporated address the items highlighted in the Guidance Note discussed above and therefore bring certain commercial insurer specific changes into the scope of the Code which also applies to limited purpose insurers. The amendments to sections 1 to 7 are to be incorporated by 1 September 2023. The amendments to section 8 are already in force and were required to be incorporated by 1 March 2023. In this section we focus on the main changes to the Code.

Subsection 8.1 sets out the BMA's expectations in relation to insurers' duty of integrity and to deal honestly, professionally, and fairly with all clients and ensure that they do not mislead clients. The remainder of section 8, which is aimed at those insurers writing domestic retail business, focuses on the duties of the insurer in marketing to and dealing with policy holders.

Certain housekeeping amendments to the Code make clear that it applies to the relatively new class of insurers being the "collaterised insurer" and "class innovative insurer general business".

Some of the more substantive amendments consider board composition. The BMA recognises the importance of appointing non-executive directors who bring perspective and external views to the board of directors and who can help mitigate against the threat of 'group thinking'. The Code now includes definitions of 'independent non-executive director' (that is to say, an independent director with no past ties to the company) and 'non-executive director' (which includes board members or senior executives of the parent company or the parent company's subsidiaries but not executives of the insurer or its subsidiaries). These definitions are consistent with commonly accepted international definitions such as those adopted by the New York Stock Exchange, NASDAQ or the UK Corporate Governance Code 2018.

The updated Code also requires the board to review board membership and effectiveness every three years and upon any material change in the business or risk profile of the company's business. Much like the inclusion of the independent non-executive director, the requirement to monitor and evaluate the performance of the board is consistent with other international codes of governance and something which we expect most insurers will be undertaking as a matter of good practice.

Finally, the updated Code incorporates, at a governance level, the assessment of an insurer's climate related risk, and incorporates the BMA's expectations as set out in the Guidance Note discussed above.

Conclusion

Thematically, the regulatory and legislative updates to the Bermuda insurance sector can be summarised as ensuring that Bermuda's regulatory environment is consistent with global best practice. The Guidance Note sets out the BMA's expectations in relation to climate risk both in terms of writing business but also in how an insurer conducts its business. The enhancements to the regulatory regime for commercial insurers align the BMA's requirements with those of its regulatory peers in both the EU and the USA. The Code updates requirements in relation to corporate governance.

We anticipate that, given the global nature of the insurance sector, many firms will have already incorporated most of the amendments and updates into their everyday decision-making process, but all insurers should review the updates to ensure that they are in compliance or, where appropriate, thinking about compliance with the updates.  

An original version of this article first appeared in IFC, March 2023. 

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